Jim Valentine: Buying a rental property during COVID-19
The COVID-19 protections for tenants have caused changes in how income properties are bought and sold. Buyers aren’t allowed to enter the property to look at it so they have to rely on old pictures, pictures the tenant may have taken, or old pictures that the seller may have to share. Offers are made after the potential buyer does a drive by of the property to assess the neighborhood and outside condition of the property.
There is only so much you can see driving by a home or multi-family property, but it can give you an idea of how the tenants are keeping things up, condition of the roof, exterior paint, landscaping, etc. It is better than nothing, which is basically what you have in this regard at this time. You have the right to have inspections after your offer has been accepted so you will know after the fact what the physical condition of the home is. This in itself can be problematic today. There is so much business being conducted that the inspectors are very, very busy. It takes longer to get them scheduled.
If you are doing a 1031 Exchange you only have 45 days to name your replacement property(ies). If it takes 15 to 20 days to schedule an inspection you can get pushed up against the IRS deadline and forced to buy a property that you haven’t seen and don’t know the true condition of. We are in Nevada, but this puts a gambling edge on the investment that wise investment Buyers aren’t used to.
With the mass exodus out of California, there are many people willing to take the gamble to acquire property in this manner. Most are deferring a major tax consequence so they have some play in their numbers. It will likely be cheaper to make some unanticipated repairs than to pay the tax bill on an outright sale.
Another risk the buyer is forced to absorb is the tenant situation. If the tenant stops paying rent there are no current consequences. The investor is out the anticipated cash flow, but he cannot evict right now due to governmental restrictions. If the Tenant is not taking care of the property, essentially protecting the Investor’s asset, he cannot be evicted. With recent legislation, if the tenant is deserving of being evicted, he now has the right to a 30-day appeal. That means if he hasn’t paid rent, the Investor must wait another 30 days and go through the mediation process before he can get them out of the property and see what condition it is in for the next occupant. The hits just keep on coming for the investor/owner.
To keep things in context, remember that investment real estate is based on cash flow. Investment goals can be cash on cash (how much return you get returned vs. what you put in), Capitalization Rate (aka Cap Rate, the percentage the cash flow delivers vs. the price of the property, or Internal Rate of Return (IRR – very complex). Regardless of how you measure your investment, your expectations are met by money in and cash flow. If you have to add cash for unexpected repairs, or miss out on rent then your investment isn’t what you bargained for.
COVID has changed the field of play for Investors in many ways. Investors still need to buy and sell according to their portfolio ambitions and needs, so business goes on. Some investment sellers are finding themselves in a position of needing cash to support adult children and their families, even themselves in some cases due to unexpected interruptions in cash flow. There is sufficient motivation on both sides that is keeping the investment real estate market vibrant. It takes trust, faith in your agent, belief in what the seller is representing, and commitment to working your portfolio for the betterment of your portfolio and family. Many people are finding themselves involved in the above scenario creating a competitive market with multiple offers. Rental properties are selling in a day or two to strong buyers.
Nevada real estate at its finest! These are the good ole days!
When it comes to choosing professionals to assist you with your real estate needs… Experience is Priceless! Jim Valentine, RE/MAX Realty Affiliates, 775-781-3704. email@example.com